BoI reduces interest rate to 1 percent

Seasonal unemployment down to 6.3%; shekel has hit its strongest levels in two years.

Bank of Israel 370.
(photo credit:Wikimedia Commons)

The Bank of Israel reduced the interest rate for the first time in four months
on Monday, lowering it a quarter of a percentage point to 1 percent just a day
after the shekel hit its strongest levels in two years.

The Bank
downgraded the annual growth forecast for 2013 down 0.2% to 3.6%, though it
upgraded the 2014 growth forecast by the same amount, to 3.4%.

In good
news for Finance Minister Yair Lapid, the bank estimated that the annual deficit
would come out at 4%, well under the 4.65%, and hit the 3% target in
2014.

Analysts had expected an eventual drop in the rate, given modest
inflation forecasts, moderate economic growth and the strength of the
shekel.

After spiking to NIS 3.65 to the dollar amid expectations of a US
strike on Syria in August, the shekel fell to NIS 3.50 this week for the first
time, prompting admonitions from Israel Manufacturers Association president
Tzvika Oren.

“The ongoing crisis in the exchange rate greatly affects
manufacturers and exporters’ competitiveness in global markets, and you don’t
have to be a great economist to understand this,” he said before the interest
rate decision, according to Globes. “At the current shekeldollar exchange rate,
many companies are swinging from profit to loss, manufacturers and exporters
will find it difficult to get orders, and people are already receiving layoff
notices.”

BoI said that, “exports continued to decline, against the
background of the virtual standstill in world trade, with pharmaceuticals
exports notable for their stabilization at a low level,” though seasonal
unemployment actually dropped from 6.7% to 6.3%.

Ehud Ratzabi, president
of the small and medium businesses association Lahav, chided Lapid and Prime
Minister Binyamin Netanyahu for not yet selecting a BoI governor.

“At the
Bank of Israel, they’re not waiting for the next governor, and are working
already to encourage economic growth,” he said.

Lapid and Netanyahu have
failed to install a successor for Stanley Fischer, who stepped down in June,
after their first two choices withdrew their nominations.

Fischer’s
deputy Karnit Flug, who was passed over for the position, has since served as
Acting Governor, and continues to guide and vote with the monetary committee
that makes interest-rate decisions.

Some analysts expected the bank to
wait for a new governor before making a decision, though the extended period of
time it took to install one may have tried the committee’s patience.

“The
lowering of the interest rate by Karnit Flug in the absence of a Bank of Israel
governor is surprising, and leaves the governor who will come in with almost no
ammunition,” said Pioneer Financial Planning’s Shmuel Ben-Arieh.